Fiscal Conservatism and Transfers

The key idea of fiscal conservatism, i.e., a conservative fiscal policy, is that when the government spends money, say, on a bullet, that money is spent on that bullet, and that money is not coming back. The economic resources spent in creating that bullet could have been more efficiently allocated by the market.

However, it is different for government transfers, i.e., when the government raises money through taxes and gives it to another party. This is a zero-sum redistribution of wealth within the economy, a "mere transfer", and that money is coming back, to be spent by the recipient of the transfer.

The benevolent government carries out such transfers in hopes of effecting a second-order positive effect from the wealth redistribution, and hopes that the positive effect outweighs the distortions in incentives caused by taxation.

Thus, fiscal conservatism and the degree of wealth distribution are distinct ideas, and phrases like "small government" and "lower taxes" conflate them.

With this in mind, I am convinced that the $700 billion dollar bailout is just a transfer. Real estate developers and sellers did well, mortgage lenders and buyers took a loss, and if the bailout passes, then some of that loss will be shouldered by taxpayers. (Maybe the tax rate can be raised on profit from real estate sales, thus completing the circle.) In the grand scale of things, it's simply money flying around from one hand to another. The government is not really spending (or wasting) money on anything.

Don't lose sight of real government spending, for example the Iraq war.